KATRINA MADEWELL: Welcome to the IRS Solution Attorney show.
DARRIN T. MISH: I am the host the IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: I’m your co-host Katrina Madewell. Are you thinking about that one today Darrin, it seems like you paused a little bit.
DARRIN T. MISH: No, I was laughing because normally I intro the show and so you kind of threw me off. I’m supposed to say welcome and you said it.
KATRINA MADEWELL: You were just sitting there so I wasn’t sure you looked a little stunned.
DARRIN T. MISH: Yeah well you know I’m dazed and confused from time to time.
DISCOVER SEVEN SECRETS THE IRS DOESN'T WANT YOU TO KNOW
KATRINA MADEWELL: I’ve done it remember we had a show a little while back where I didn’t even say my name you are like who are you?
DARRIN T. MISH: Well I think probably the best thing about the show is the relationship that you and I have, and just the fun that we have when we are doing the show together.
KATRINA MADEWELL: We won’t, we will spare you the details on the chickens and all that kind of stuff today because we actually have a lot of stuff to cover.
DARRIN T. MISH: You know there is people tuning in who have never heard the show and now they are like chickens…
KATRINA MADEWELL: Chickens…
DARRIN T. MISH: Number one what are these people going to talk about and number two what do chickens have to do with it.
KATRINA MADEWELL: Well we talk about chickens because Darrin has a farm but you will have to listen to the show on the podcast to get that story.
DARRIN T. MISH: I am like amateur chicken farmer who makes lots of mistakes and has no idea what he is doing. Although, the chickens are all safe. The raccoons have not entered the new chicken coop so that’s fantastic.
KATRINA MADEWELL: And we promised on the prior show that we are going to talk about Offer in Compromise and how it works. I know it’s going to take a long time so let’s get started.
DARRIN T. MISH: Ok so that’s the topic of the show What Is an Offer in Compromise and how does it work. So, an offer in compromise is an agreement between the taxpayer and the IRS. That settles the taxpayers tax liabilities for less than the full amount owed. So basically, it’s a deal, you can make a deal to settle for less with the IRS I mean that is fantastic I love them.
KATRINA MADEWELL: Yeah well, I mean they have to because we talked about how you got to get the taxpayer back in the system so they have to have some type of resolution.
DARRIN T. MISH: Yeah so quick we will talk about the philosophy of why the IRS does this. Because we get a lot of hate mail, or I do at least, about when I post these success stories about how a client owed 200 grand and we settled for 22 cents. Now that is an exaggeration but you know say $2200, that’s not an exaggeration. I get hate mail about, hey I had to pay my taxes I owed 8 grand and this is unfair and so on and so forth and you know what?
KATRINA MADEWELL: I love the haters.
DARRIN T. MISH: I agree that it is unfair, I do…
KATRINA MADEWELL: I love the haters.
DARRIN T. MISH: I agree, I love the haters too. Because what they are not understanding is the more, especially in social media. More social media hate they heap on me the more their friends see what I did.
KATRINA MADEWELL: Yeah and the likely hood of one of them having a tax problem is good.
DARRIN T. MISH: It helps so that is what’s so great like, I am developing a thicker skin ok, I’m not going to say that I have always been thick skinned, I’m not particularly thick skinned …
KATRINA MADEWELL: Well it’s not easy, it’s not for me either but there’s a little bit of amusement in this the fact. That I think we should do at least one show quarterly Darrin that’s all about the haters.
DARRIN T. MISH: The best of the haters that would be fun I would probably enjoy that show more than a lot of shows that we do. But anyway, back to the offer in compromise, so who is an offer not for. Well an offer is not for taxpayers who can fully pay the liabilities through an installment agreement. Or other means because they won’t qualify for an offer in compromise. So back to my hater example here, the person who says I owed $8000 and it was hard and I had to pay it and it’s not fair. Ok I will grant you that it’s not fair. My mother who is still alive and I love her to death always used to tell me when I was a kid life’s not fair and that’s true it’s not.
KATRINA MADEWELL: Right but they look at they have the means to pay for it so they are going to have them pay it, right?
DARRIN T. MISH: If you owe $8000 and you make a hundred thousand dollars or…
KATRINA MADEWELL: You’ve got $8000.
DARRIN T. MISH: You can pay $8000 either in a lump sum or probably more. Typically, you can pay that in an installment agreement of less than a hundred dollars a month and it would all work out just fine. So, it’s not for those people ok an offer in compromise think big tax liabilities. So, I would say $25,000 and above and to be more realistic more like $50,000 and above if you owe $200,000. It’s a little bit easier than if you owe $25,000 but that’s who an offer in compromise is for.
KATRINA MADEWELL: And that’s all relative correct right to their income?
DARRIN T. MISH: Yeah you know, we are based in Tampa Florida and the Tampa Bay area is not a particularly high income place. I do offers for taxpayers in all states you know frankly if you live in San Francisco where it’s very expensive and the cost of living is very expensive. And people earn a lot more money than all the numbers that we come up with for examples today they are all going to be skewed up ok. So, a hundred grand in San Francisco California is like almost poverty level and a hundred grand in Tampa, Florida is not poverty it’s not rich but it’s like…
KATRINA MADEWELL: Good enough to pay an $8000 tax bill.
DARRIN T. MISH: Yeah, it’s middle class don’t you think? A hundred thousand dollar annual…
KATRINA MADEWELL: You are above you are way above the median income area.
DARRIN T. MISH: The median income in Tampa is like 50-$60,000 and so a hundred is pretty good.
KATRINA MADEWELL: So we talked about who does not qualify who does qualify?
DARRIN T. MISH: So, in order to qualify for an offer, you are going to have to file all of your missing tax returns and we talked about, we talk about that all the time…
KATRINA MADEWELL: You’ve got to catch up on your returns.
DARRIN T. MISH: Most people who come in with a big tax problem have some unfiled tax returns. And they are really blowing it up into a bigger deal emotionally then it needs to be. So, we have to file all of their missing, all their tax returns that are missing going back at least 6 years, if you owe. If you have unfiled tax returns more than 6 years old, then there is a chance you won’t have to file those really old ones. You must make all your required estimated tax payments if you are self-employed.
Now I don’t have a lot of time to devote to this but basically, we must show that you are making your estimated tax payments. So, if you come to me in June and we are half way through the year and we’ve got 2 estimated tax payments due you’ve got to make 2 estimated tax payments. And we will help you figure out what those are and how much they are. And all of that but if you come to me in December we are going to wait until the next year to file an offer.
Because you have to make 4 estimated tax payments and most people can’t afford to do that. In the first quarter, it’s going to be the best time of the year to file an offer and the fourth quarter. Arguably third or fourth quarter are going to be one of the hardest times of the year if you are self-employed and must make estimated tax payments. So, we are going to go ahead and try to solve that dilemma right off the bat and it’s, it’s so variable and so unique I can’t really explain it here on the radio but…
KATRINA MADEWELL: You could make another show about it.
DARRIN T. MISH: I could. In most cases the IRS won’t accept an offer in compromise unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential so or RCP so let me explain what that means ok…
KATRINA MADEWELL: What is that?
DARRIN T. MISH: That was a bunch of lawyer talk so there is a formula for what we call an offer based on doubts to collectability. And we are talking about a cash offer right now. A cash offer is payable within 5 months of acceptance of the offer. It’s important to understand that these offers take a long time to be accepted. They take a long time to be worked on average an offer in compromise is going to take somewhere between 6 and 18 months. From the time that you file it before the IRS comes back and says yes or no.
KATRINA MADEWELL: So you’ve got some time to save and plan and prepare.
DARRIN T. MISH: Yes, some time. Basically, the offer calculation is pretty simple it’s based upon relatively simple math it goes like this. Your monthly disposable income times 12 plus your assets equals the amount of your offer. So, let me give you an example if you have $300 a month in disposable income, 300 time 12 is $3600 let’s assume you have no assets, your offer amount is $3600.
KATRINA MADEWELL: What if I have $50,000 equity in my home I’m going to add that to the 3600?
DARRIN T. MISH: Yeah then it would be $53,600 ok simple math. Now what does monthly disposable income mean. Since I deal with this every day and have for 18 years, sometimes I forget to define stuff. So, your monthly disposable income is the difference between your gross income. Which is everything minus your allowable expenses which are things like your housing, utilities your car payments, your taxes, your food, clothing, miscellaneous expenditures, your health care things like that.
KATRINA MADEWELL: Keyword there is allowable.
DARRIN T. MISH: Yeah, the keyword is allowable.
KATRINA MADEWELL: What things do people think are allowable that are not?
DARRIN T. MISH: Well for example every single county in this country has a chart for your housing and your utility expenses. So, this is your housing and your utilities so it’s your mortgage or your rent payment. Plus, your electric bill plus your gas bill plus your water bill plus your garbage all that stuff. Every county has a chart and then the chart says, has a different number for if you are living alone versus if you are living I think with a family of 6. And it kind of stops at 6, after 6 they just give you like a $195.00 extra for each additional person and carry on.
In the Tampa Bay area if somebody had a $3700 a month house payment for a family of 4 you are going to be grossly over. So, I will give you an example the family of 4 depending on the county here in the Tampa Bay area you probably going to be allowed somewhere between like $2200. Probably roughly about what you are going to get so if you are trying to claim. If your actual housing and utilities is $3700 it’s going to throw, it’s going to throw us off.
KATRINA MADEWELL: They are going to say no.
DARRIN T. MISH: One of the benefits of coming to somebody like me who does this for a living is very few people walk in off the street. They are so strict that very few people live their lives according to these financial standards. And so, one of the things that we can do is we can look at how your financials are now. And then we can make simple suggestions to make your financials better for an offer. There is nothing illegal, unethical or immoral about us planning, arranging your finances so that you get a better deal.
KATRINA MADEWELL: Well you are planning how to solve it, fix it and get them back on the straight and narrow.
DARRIN T. MISH: And you kind of alluded to this a minute ago, where you said the IRS is more concerned about getting you into the system. And that’s true so if you owe the IRS $250,000 and you’ve been out of the tax system for 10 years. They are actually way more interested in getting you into, back into the system then getting the $250,000. Because they know they are not going to get that money.
KATRINA MADEWELL: Right. Alright so when we come back you want to talk a little bit more on this reasonable collection potential and how the IRS gauges that?
DARRIN T. MISH: Sure.
KATRINA MADEWELL: Alright well you are listening to the IRS Solution Attorney show stick around Mr. Darrin Mish is going to dive into a little bit more of those logistics. If you want to get him his off-air number is 888-get-mish, that’s 888-…
DARRIN T. MISH: 438-6474.
KATRINA MADEWELL: We will be back in just a minute.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I am the IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: I’m your co-host Katrina Madewell thanks for hanging out through the break we appreciate it.
DARRIN T. MISH: Today’s show is all about What is an Offer in Compromise and how does it work. And during the last segment we talked about the calculations that the IRS uses to determine the amount of the offer. And it goes like this, monthly disposable income times 12 plus assets equals the amount of the offer. So, the example that we used was if your monthly disposable income was $300. 300 times 12 is $3600, let’s assume no assets that would mean that you could settle your case for $3600. Now there is one exception and the exception is if that $300 is enough to full pay the liability within the amount of time left on the statute of limitations then you are not going to get a deal. So, what that means is bigger cases are easier to settle then smaller cases so let me try to give you an example.
KATRINA MADEWELL: Well like earlier you said the person had 7 years left.
DARRIN T. MISH: Ok so I am going to give you a little bit better example, you have $300 a month disposable income and you owe $25,000. And that’s what makes $25,000 cases hard because let’s say you have 10 years left on the statute of limitations. And you just had that $300 so you would normally think that well 300 times 12 is $3600. They are going to cut me a break and let me settle this for $3600. Well that is not the case because $300 times 120 months so 10 years is $36,000 and since $36,000 is more than $25,000 the IRS us going to say no deal. You don’t get a deal because you can afford to full pay us within the amount of time that we have left to get the money.
KATRINA MADEWELL: I think that’s the thing that people don’t realize when they see some of the stories in here. The train wrecks are that there’s this one little nuance that makes a difference.
DARRIN T. MISH: Yeah and that’s why my niche is people who owe higher amounts of money. When somebody comes in and they make $80,000 and they owe $25,000 to the IRS and they are all upset about it. And I totally understand why they would be upset but and they want me to waive my special IRS magic wand and make it go away. That’s a hard case the $25,000 case is hard. Now the $250,000 case under those same fact patterns is not as hard and I know that is counter intuitive and I know it doesn’t even sound right. But the way the system works it is right and so that is why you are going to hear me say so. I have so many, so many train wreck of the week’s segments where I talk about my success stories where the numbers are big.
KATRINA MADEWELL: Right.
DARRIN T. MISH: Because it’s just somewhat easier.
KATRINA MADEWELL: So what are the 3 rules if you will the IRS will accept the offer in compromise.
DARRIN T. MISH: Ok so there are 3 different types of offers and that is really what you are asking what types of offers are there. The first is called An IRS doubt as to liability and in this type of offer which is relatively rare. I’ve done a couple but not that many, you are trying to assert that hey IRS I don’t owe you this money. Now that’s not saying the interest and penalties are unreasonable because we know they are. That’s not what we are saying here we are saying I don’t owe you this money because A. you’ve got the wrong person. Which happens sometimes you might have a JR and a SR where they’ve confused the social security numbers. That happens sometimes not that often but it does happen or you might be look I have already paid the money and that does happen. And so, that would be sort of the ideal circumstance to file an offer based on doubt as to liability.
KATRINA MADEWELL: Curious question what about that train wreck that we had before. Remember where we said that the guy sort of changed ownership interest or sold the company. And then he worked or acted as a contractor through the company. But he still owed some tax debt would anything like that play a role?
DARRIN T. MISH: It probably would not have been a successful offer based on doubt as to liability. Because in that scenario that gentleman had a couple of different opportunities to appeal. And I think he did and the IRS still came back in held in their favor. They did owe the money and that’s why I didn’t pursue at that offer based on doubt as to liability. And that case, what we did in that case is the next kind of offer which is to doubt as a collectability and that’s pretty much exactly what it sounds like. The IRS doubts their ability to collect the money and so they are going to make you a deal. And that’s why that exception kind of makes sense.
There is no doubt as to collectability if you can full pay with monthly payments within the amount of time they have left. And so, when I talk about an offer in compromise 99% of the time I’m talking about an offer based on doubt as to collectability. Now let me circle back to the doubt as to liability real quick. You know that calculation that I gave you that doesn’t even count it goes out the window. You just get to pick a number hundred bucks whatever so and the doubt as to collectability is where you have the monthly disposable income times 12 plus assets equals the amount of the offer. The third type of offer is something called Effective Tax Administration. And I don’t really like this very much because it doesn’t really tell us what it is but an Effective Tax Administration offer is based upon.
A fact pattern where taxpayer can afford to full pay but it would be unfair to make them do so. So, I will give you a sort of a classic example and this happens a lot down here in Tampa. You have the senior citizen living on fixed income, lots of equity in their house. So, they have hundred grand equity in their house and they owe 50 grand to the IRS. You know but if you, if you had them take that 50 grand out of the equity of the house. If they could then they couldn’t afford to live there and they really couldn’t afford to live anywhere. And so sometimes although rarely the IRS will accept an Effective Tax Administration offer and cut a deal in that scenario.
KATRINA MADEWELL: Yeah, I don’t think I have ever even heard of that we’ve never talked about that.
DARRIN T. MISH: Done a couple, they are rare across the country I’m plugged into lots of guys who do what I do and it’s like a big deal, when one of us gets an effective tax administration offer we are like all bragging and…
KATRINA MADEWELL: It’s an exciting time.
DARRIN T. MISH: Yahooing and stuff like that so that’s an effective tax administrative offer.
KATRINA MADEWELL: I’m sure this is like super complicated for most people so I just want to get out your off-air number again. Because some of these things are way to in-depth to even chat about on air so they can get you at 888-get-mish.
DARRIN T. MISH: That’s 888-438-6474 or you can visit the website at getirshelp.com. You can also subscribe and download the podcast as the Apple ITunes store as well as the Android store. And you can also download our app which is essentially the podcast and it’s available on ITunes and the Android store as well.
KATRINA MADEWELL: So forms to use do you want to jump into that or is that, that is what you guys handle but…
DARRIN T. MISH: Well let’s talk about it because we are not here to hide anything. And if, my philosophy is if anyone listens to my show, our show, and can help themselves then I feel pretty good about that.
KATRINA MADEWELL: Well you are a pretty good resource that was kind of the whole reason for starting the show.
DARRIN T. MISH: You know I really do, this is, a lot of people will think this is corny and maybe even insincere but I can assure you it’s not. I believe in treating people the way that I want to be treated and I try to live my life like that. And I fall short like everybody does but I try to treat people the way I want to be treated. And if I was listening to this show I would kind of want to know how to do it if nothing else as an overview. So, I can kind of understand more about is so I can make an educated decision, should I hire somebody or should I just try to do this myself.
KATRINA MADEWELL: Well not to mention we’ve already talked about the fact that if you owe a 10 or $25,000 tax liability it’s a lot harder to solve. So, it might make sense for someone to try to use these resources and do it on their own.
DARRIN T. MISH: Yeah and frankly if you owe $8000 and you don’t have any unfiled returns I don’t really want the case, and that sounds harsh but that’s just….
KATRINA MADEWELL: Well I mean essentially you would be taking their money without offering them a lot of help.
DARRIN T. MISH: Well and the thing is that it’s, that case is harder in a lot of respects then an $80,000 liability and there’s not a lot of fee there to still make it make sense. So, I don’t want to represent people where the fee doesn’t make sense because then they are just unhappy. And I’m unhappy because the case is harder and so on and so forth but I try to help everybody if I can. So, let’s talk about the forms, you need to fill out something called a 433A. You can download these forms from the IRS by the way and their website is irs.gov, irs.gov. So, you need a 433 A which is called A Collection Information Statement. And that’s where you fill out your personal income and your personal expenses. Now if you are self-employed or you have a corporation then you are also going to have to fill out a 433 B, B stands for business. You have to fill out the 433 B first. And then you can fill out the 433 A and with the 433 A is attempting to do is it’s attempting to show what your monthly disposable income is. So, that we could plug that into our equation. Then once the 433 A and B are done then you are going to need to do a form 656.
So, it’s 656 is the form for the offer based on doubt as to collectability and the offer based on effective tax administration. If you want to do one of these doubt as to liability offers, then you do an offer or a form 656-L again. Really rare but there are times when it’s come up, every one that I have filed I won because I knew that my taxpayer was not liable and I could prove it. So again, it’s not that run of the mill person who says or the run of the mill situation. Because there is no run of the mill people but the run of the mill situation where person says it’s not the taxes it’s the penalties and interest. We are not talking about that we are talking about, no you don’t understand I already paid and they lost my check.
KATRINA MADEWELL: Right.
DARRIN T. MISH: That happens, that kind of thing happens. But I probably, in that case where they lost the check I probably wouldn’t file an offer I would probably just go find the check. I would just get the transcripts and I would just find the check and solve it that way.
KATRINA MADEWELL: So can we stick a quick little, can we upload these or link to these on the IRS website can we stick these in on the IRS Solution page?
DARRIN T. MISH: Sure, we can put some links to the IRS website on the IRS Solution Attorney page.
KATRINA MADEWELL: Because you know I was thinking talk radio, lots of people are in their car or they are in and out. And they are like whoa I’m not going to remember these numbers let alone where to get them so we will post them for you.
DARRIN T. MISH: Sure, we can do that for sure.
KATRINA MADEWELL: Alright so hop on over to the IRS Solution Attorney show and we will post those up there for you. It’s about that time where we do have to roll to our next break but when we come back we will talk about what’s next and you can reach Darrin at his off-air number 888-get-mish, again that’s 888-…
DARRIN T. MISH: 438-6474.
KATRINA MADEWELL: We will be back in just a moment.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I am the IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: I’m your co-host Katrina Madewell thanks for sticking in with us through the break.
DARRIN T. MISH: Today’s show we are talking about what is an offer in compromise and how does it work. So, for a brief recap an offer in compromise is where you get to make a deal with the IRS to settle for less. I cannot sit in my car Katrina and listen to the radio without hearing an ad for a tax resolution company who offers this service to try to make a deal with the IRS to settle for less.
KATRINA MADEWELL: And one size does not fit all I can assure you.
DARRIN T. MISH: I hear them all day long and it just kind of makes me crazy because an offer in compromise is not the solution for every single person who owes money to the IRS. And that is one of the things we are talking about here today on the show is when it might be appropriate for your situation if you owe the IRS tax money.
KATRINA MADEWELL: So what’s next we talked about a lot of the forms we will post those on the IRS Solution Attorney page.
DARRIN T. MISH: We can post it on the IRS Solution Attorney Facebook page or there is actually a website for. Just for the IRS Solution Attorney show that is irssolutionattorney.com where you can also catch up with the past episodes and what not. We post every episode at the irssolutionattorney.com website and there’s also a link on my main website at getirshelp.com. So, the next thing that we need to talk about is well how much does this cost in terms of filing the offer with the IRS itself?
KATRINA MADEWELL: It cost money to do that?
DARRIN T. MISH: Yeah it does there is a $186.00 filing fee and then you have to pay a 20% down payment for whatever you are going to offer to the IRS. So, let me give you an example if you are going to offer a thousand dollars to the IRS because that is how the math works out. It comes out to a perfect thousand dollars you are going to pay a $186.00 filing fee and then 20% of the thousand dollars so $200. And you are going to submit those checks when you file the offer in compromise with all of the documentation. That is required as well and then the IRS is going to sit on that for between 6-12 months.
KATRINA MADEWELL: Why do they require that just to make sure that things aren’t clogged up in their system with nonsense?
DARRIN T. MISH: Well they require this because in the past before they had this requirement, people like me would file offers…
KATRINA MADEWELL: Just because…
DARRIN T. MISH: No chance of success because…
KATRINA MADEWELL: And it’s buying you time right your clock could be running out.
DARRIN T. MISH: Because it does stop the statute of limitations from running which is bad but it also prevents all collection action from happening which is good so before they changed the rules I think in around 2000 I don’t remember in the 2000’s they changed the rules, before that we would file offers and it would take the IRS 3 years, 4 years like forever to even get in touch with us and it was just a great way to kind of get the IRS off your back and keep them off your back so now, I forgot to say this there’s also a 2 year time block that the IRS has to work these offers, they have got to render a decision within 2 years, if it goes 2 years and a day its deemed accepted as filed…
KATRINA MADEWELL: Right so…
DARRIN T. MISH: So, what that means is if you file an offer for a thousand bucks and 366 days goes by then it’s accepted at a thousand dollars. Now does that happen I don’t think so, I really don’t I’ve never heard of it happening, never happened to me I got close I got real close on a case recently I think we got to the 23rd month and my client was real excited and my client was like hey we are almost there I’m like it’s not going to happen it’s just not going to happen they are going to issue a denial and give us our appeal rights but they are not going to let the time blow, they have computers to…
KATRINA MADEWELL: And that is probably someone’s job right they are all over that time.
DARRIN T. MISH: Probably multiple people’s job to make sure that doesn’t happen. But one can never underestimate the government, it probably has happened but it’s never happened in a case that I have heard of.
KATRINA MADEWELL: So is there ever a time the application fee is not required or is that just always?
DARRIN T. MISH: Yeah there is a couple of times when it’s not required. You know when you file one of those doubt as to liability offers, remember that’s the type of offer where you are trying to assert hey I don’t owe the money…
KATRINA MADEWELL: I’m the wrong John Smith.
DARRIN T. MISH: Right I am the wrong John Smith. I’ve never represented a John Smith, I’ve represented some people with generic names but I don’t think I have ever had a John Smith.
KATRINA MADEWELL: You know what I mean.
DARRIN T. MISH: I think I had a John Doe once but anyway if you are filing one of these doubt as to liability offers there’s no application fee and no down payment because it’s almost like…
KATRINA MADEWELL: Saying it’s not you.
DARRIN T. MISH: Yeah you are like hey man stop hold everything this is not me it’s not fair and so they generally don’t require a fee for that. The other type of time that they don’t require a fee is if you are below the Federal poverty guidelines. Actually, if you are below 250% of the poverty guidelines then you don’t have to pay the fee. And frankly it’s kind of low income. It’s very low income and we have software that tells us automatically if you must file a fee or not so it does come up it’s not super common. So, let’s talk about the different kinds of payment options that are available. There is the lump sum cash offer and that’s what we have been talking about the most. And that’s what we talked about quite frankly the most often here on the show. And that’s a cash offer payable within 5 months of the acceptance of the offer.
KATRINA MADEWELL: 5 months same as cash.
DARRIN T. MISH: Yeah like 5 months same as cash so but remember…
KATRINA MADEWELL: Except for more time.
DARRIN T. MISH: It’s minus the 20% that you have already put down.
KATRINA MADEWELL: Ok.
DARRIN T. MISH: So, if you offered $10,000 and you put $2000 down then you have 5 months to come up with the $8000 ok.
KATRINA MADEWELL: Perfect.
DARRIN T. MISH: So, that…
KATRINA MADEWELL: Plus whatever time it took them to actually get to it.
DARRIN T. MISH: Yeah which is probably like a year or a year and a half.
KATRINA MADEWELL: So the 5 months doesn’t start until that time.
DARRIN T. MISH: Exactly it starts quite a bit later down the road. The other type of offer that is available is called a periodic payment offer. And so, what that is it gives you 24 months to full pay the balance. Now that sounds pretty good and when people first hear about that they are like why would anybody do cash when you only have 5 months. When you can do a periodic payment offer which is 24 months.
KATRINA MADEWELL: I was going to say what’s the difference?
DARRIN T. MISH: Well here’s the deal here’s the kicker. Remember it was monthly disposable income times 12 for the cash offer right well for the periodic payment offer. It’s monthly disposable income times 24 so it’s double. Most people doesn’t make any sense because it’s kind of a silly scenario but this is when it does come in handy. Let’s say I have a client and they have essentially no monthly disposable income the offer is going to be predicated basically, calculated basically just on assets so what I will do a lot of times is I will file that as a cash offer because you don’t have to make any payments while the offer is pending because in a periodic payment you do have to make the payments while the offer is pending which is terrible because what happens if it’s denied you still made all those payments right so what we do is we file, let’s say you have $50,000 equity in your house and you owe $250,000 to the IRS so what we would do is we would file that as a cash offer, we pay the 20% and kind of get the clock ticking and when the IRS came back and said they would accept it at the very last minute I would say hey let’s switch that over to a periodic payment offer and pay that over 24 months and they always say ok…
KATRINA MADEWELL: So they go for it?
DARRIN T. MISH: Yeah, they do it every time. So, that works out well and so that is when we would do a periodic payment offer is when you know the amount of the offer is based on assets. The value of assets not monthly disposable income.
KATRINA MADEWELL: But I guess 24 months is better than zero months, right?
DARRIN T. MISH: For sure and in that scenario paying $50,000 out over 2 years. Which is also kind of a stretch right but if you could do that that’s better than trying to pay $250,000 because you are getting like 80% off.
KATRINA MADEWELL: So do they have to suspend their collection process and everything while they are in the middle of this?
DARRIN T. MISH: Well the offer is pending, they have to suspend collections so that means they are not going to levy you. They are not going to, if they haven’t filed a lien they are not going to file a lien which is good. And they are basically going to leave you alone while the offer is being processed. And sometimes offers are filed that just seem, they seem kind of fantastic you know they seem kind of unrealistic. And to the IRS’s credit they stop all collection action and they allow that offer to be, to be worked completely. And so, that’s one of the big benefits of filing an offer. Now the counter balance of that benefit is that the statute of limitations is suspended. So, let me back up and explain what the statute of limitations is, the IRS has 10 years from the date. The tax is assessed so you can think of that as when the return is filed when the balance is due. They have 10 years from that date to collect the money. So, when you file an offer in compromise and let’s say it takes 2 years. Then that 2 years doesn’t come off of the 10 it’s just there waiting on the back end if the offer is not accepted. So, it doesn’t run while the offer is pending.
KATRINA MADEWELL: So that is the down side of it but…
DARRIN T. MISH: That would be the downside and so if you have 8 months left on the statute of limitations and things are kind of going ok then you probably wouldn’t want to file an offer because, you might because the IRS is going to realize they only have 8 months…
KATRINA MADEWELL: But can you wait until they make the first move?
DARRIN T. MISH: Yes, we do that all the time.
KATRINA MADEWELL: Ok I was going to say I hope so.
DARRIN T. MISH: You know if the IRS is, you know there is a revenue officer and he is showing up at your house or your work. And he’s breathing down your neck and you have 8 months left on the statue. Yeah you might want to file an offer because it’s going to make him go away. But if they are not calling you or not levying you or not bugging you. You probably don’t want to file an offer in that scenario because the time is going to run out.
KATRINA MADEWELL: So I imagine you know once you roll through this 12 plus months later there is a little bit of negotiations going on right back and forth and so what’s acceptable and what’s not?
DARRIN T. MISH: What usually happens is I’m going to low ball them so I am going to offer them you know $250 or $500 because that is how…
KATRINA MADEWELL: Just because…
DARRIN T. MISH: But also, because the 20% of that number is lower than a bigger number. Right and any negotiation you can only go up you are not going down so I’ll start out low. Let’s say I offer $500 and you know if they come back and they say well Mr. Mish we can’t take $500 but we can take $2246.00, typically I stop negotiating ok…
KATRINA MADEWELL: They’ve already given you something they will take.
DARRIN T. MISH: They have given us a smoking deal, I call the client and go hey they will take $2246 what do you say and you can’t say no so that’s the deal.
KATRINA MADEWELL: So once the IRS is saying yep we will take this number then what?
DARRIN T. MISH: Then it takes a month or 2 for them to give the final paperwork that says it’s accepted. Because technically that person who is making that decision they are only making a recommendation as to acceptance. They can’t accept it. So, they have to send it up to management or whatever and then that takes a month or 2 to get sent back down. And then the client eventually will get an acceptance letter and then the 5 months runs from the date of that letter.
KATRINA MADEWELL: So once they get that letter they have to start making the payments right away?
DARRIN T. MISH: Well if it’s a cash offer and they have 5 months they don’t have to make any payment…
KATRINA MADEWELL: But I mean can they make payments over 5 months or they can do whatever they want?
DARRIN T. MISH: For sure they, the way we write up our offers is they have 5 months to pay and they can just, they just have to pay it within the 5 months.
KATRINA MADEWELL: Now what happens if they run over that 5 months at all are they lenient or like if you are a week over that does it matter?
DARRIN T. MISH: By the time you’ve got an accepted offer the IRS has something invested in that offer being a success so sometimes there is a little bit of leniency and sometimes if there is a dramatic change in circumstances they might work with you a little bit but by and large you’ve signed a contract that you will do X and they expect you to do X so I’ve seen it happen both ways where there is some leniency and I’ve also seen it like nope that’s it it’s defaulted and what happens when an offer is defaulted is that all of the remaining tax, penalties and interest to now it now comes back….
KATRINA MADEWELL: They come back like a boomerang baby.
DARRIN T. MISH: I had one client one time really nice couple, super nice couple and we filed an offer in compromise, got them a good deal and they defaulted, I forget how they defaulted they probably didn’t file tax returns or something but they defaulted, it all came roaring back it was a huge number to it was like 250-300 grand all came roaring back, and I’ve never done this before but we filed a second offer and they took the second offer and the taxpayers paid it and they didn’t default it and it all….
KATRINA MADEWELL: You are like I am going to kill you if you don’t keep this thing current.
DARRIN T. MISH: It all ended happily ever after but there were times when I was losing hair faster than normal dealing with that situation. But they were nice people, and that’s what helped is that they were so nice that you want to help people out who are nice to you.
KATRINA MADEWELL: Well it’s about that time we have to take a quick break when we come back we are going to talk about the right to actually appeal this and if you want to get Darrin at his off-air number he’s at 888-get-mish…
DARRIN T. MISH: That’s 888-438-6474.
KATRINA MADEWELL: Again that’s 888-get-mish. Stick around we will be back in just a moment.
KATRINA MADEWELL: Welcome back you are listening to the IRS Solution Attorney show.
DARRIN T. MISH: With THE IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: I’m your co-host Katrina Madewell thanks for hanging with us today’s been a fascinating conversation.
DARRIN T. MISH: If you owe taxes to the IRS then this is probably a fascinating topic. If you don’t owe taxes to the IRS and you don’t ever think you will it’s probably the most boring thing you’ve ever listened to.
KATRINA MADEWELL: Well we are hoping that you at least learned something so that maybe you can refer somebody you know.
DARRIN T. MISH: Absolutely. So today we are talking about what is an offer in compromise and how it works. An offer in compromise is where you can make a deal to settle for the IRS, the IRS will make a deal under the right circumstances with taxpayers. And I’ve done deals where they’ve wiped out 95% of the tax liability but it depends right it depends on your facts and circumstances.
KATRINA MADEWELL: It always depends. So, you’ve gone through this whole process. You made an offer in compromise, the IRS came back what if you still don’t agree?
DARRIN T. MISH: So, if the IRS rejects formally rejects your offer in compromise, this happens quite a bit, if they reject it then you have the right to appeal. So, you have 30 days to appeal from the date of the rejection letter and there could be lots of reasons why you would disagree. Maybe the math is off or maybe they didn’t allow expenses that should have been allowed that type of thing. So, you file an appeal and I believe the form number is 13711 but don’t quote me on that but I think that is the offer appeal paperwork. And you send in that offer appeal with your updated documentation and your proof and your argument and what not. You are going to want to send that to them you know US Certified mail or some provable method otherwise I don’t know how but anything that doesn’t, isn’t provable trackable it’s going to get lost by the IRS they are going to say it was not timely filed and…
KATRINA MADEWELL: Imagine that.
DARRIN T. MISH: You are going to have a problem there but if you file it, if you send it in certified that should be fine. So, in the offer appeal again it’s monthly. In most of these cases, it’s monthly disposable income time 12 plus your assets equals the amount of your offer. So, and sometimes the IRS you know they, you didn’t prove. For example, you claimed life insurance as a monthly expense and you didn’t show them any proof that you are paying the life insurance.
So, you would provide the proof that you are paying the life insurance you probably win that argument ok but that’s, basically. It’s not horse trading like when you think of a personal injury attorney. You know, you kind of think a personal injury attorney calling up the insurance adjuster. Or even the insurance companies lawyer and saying ok look let’s make a deal my guy is hurt bad and you know we want a million. And you guys want to offer a hundred grand and let’s cut it in the middle let’s do 500 and call it a day. That’s not how it works in my world at all.
In my world we can’t just say well how about we just compromise and make this go away. No, we have to argue about, we argue about well you know the allowable expense. In this case we claimed $137.00 and you know you said we could only take $80.00. And ok, I agree $137.00 isn’t enough but $117.00 is the right number. I mean that is the kind of thing that we argue about because it all matters when you plug those numbers in at the end so a lot of times.
Also, and we haven’t talked about the fact that taxes can be discharged in bankruptcy in this show, but taxes can be discharged in bankruptcy. So sometimes if the IRS won’t take my always super reasonable offer that I make when I file an offer. Then on the appeal we will threaten bankruptcy and that works quite a bit. Because if the IRS is going to get zero in a bankruptcy and we are offering 25 grand. Let’s say then the IRS will typically take the 25 grands over the zero which makes me kind of proud to be an American. Because at least that is like a reasonable financial decision that the government is making on behalf of taxpayers but.
KATRINA MADEWELL: And there are times when they actually just return your offer to you right?
DARRIN T. MISH: Yeah there’s a situation where it’s called the IRS can just actually return your offer. A return does not have appeal rights and let me give you an example where an offer can be returned. Let’s say you know you filed your offer in 2015 and you don’t file your return in 2016. Well they are going to give you a couple of weeks to file the 2016 return and if you don’t they are going to return your offer. Which really stinks because you are not going to get appeal rights and you are going to have to start all over if you are going to file an offer in compromise. We don’t usually let this happen to our clients, there are some clients that just, you can’t help it. I mean they, I can’t file the return if they don’t give me what I need to prepare their return so there are some offers that just get returned.
KATRINA MADEWELL: And so there are some additional information and resources out there as, well right?
DARRIN T. MISH: Yeah you can always go to the IRS website at irs.gov or you can visit our website at irssolutionattorney.com and you can get a link to the IRS’s website but there’s what they call the pre-qualifier tool on the IRS website where you can kind of plug in your numbers and it will kind of tell you if you qualify or not but I don’t like the tool and here is why because you don’t know as a taxpayer who doesn’t do this all day every day, you don’t know what numbers to plug in to that tool to tell you if it’s a good deal or not so I would say many people go ahead and file or say they come in the office and they say well I already did the pre-qualifier tool and I don’t qualify and we are still able to do it because we can make little changes and tweaks and things like that…
KATRINA MADEWELL: This is exactly why they need an attorney.
DARRIN T. MISH: Yeah exactly because I’ve been there done that done a lot of times, done thousands of offers and I know what I’m doing.
KATRINA MADEWELL: You should pull up a bullet point list quick.
DARRIN T. MISH: Of why.
KATRINA MADEWELL: The benefits of having an attorney.
DARRIN T. MISH: You know you need, because it’s complicated ok and we are going to handle the negotiations you are not going to have to talk to the IRS. If we do an offer for you, we are going to keep the IRS off your back while the offer’s being prepared and filed frankly. We have a track record at my firm of having good success. If you listen to the show you know there is a train wreck of the week at the end of every show and we are going to get to it in about 30 seconds. I think and you know I have a lot of experience in knowing when offers hit snags, I know how to handle those snags. It’s about that time.
KATRINA MADEWELL: We are right on time.
DARRIN T. MISH: It’s about that time for the IRS train wreck of the week. This is the segment of the show where we talk about somebody who came in. And frankly their situation was just a train wreck and after I got involved we managed to solve it for them basically. So, in this case, I don’t have much time today but I don’t need that much time in this particular case. I had a doctor who is living in the Virgin Islands and the IRS filed what’s called a notice of deficiency saying that he owed over $201,000 to the IRS. Now here’s the little deal here.
Here’s the little technicality is that residence of the Virgin Islands doesn’t pay taxes to the Internal Revenue Service. They pay taxes to the Virgin Islands taxing authority. They pay taxes at the same rate but they file their returns in the Virgin Islands and that money is supposed to stay in the Virgin Islands for Virgin Island priorities and budget. But in this particular case, this doctor had some insurance 1099’s that were issued from the mainland of the US to his practice.
So, when the IRS saw that they went ahead and tried to assess over 200 grand to him personally. This happened to this gentleman like 2 or 3 years in a row and I’ve handled all of them with success but in this particular case the IRS issued a notice of deficiency which meant we had to sue the IRS because we disagreed with them so long story short…
KATRINA MADEWELL: It’s not every day that you hear an attorney say they are going to sue the IRS.
DARRIN T. MISH: So, long story short we sued the IRS and the other day they called me and they said we concede your client owes zero, big fat zero.
KATRINA MADEWELL: What was that initial number?
DARRIN T. MISH: $201,000 and some change, went down to zero.
KATRINA MADEWELL: Ok, so let me just go back to that list. That’s why you need an attorney right there.
DARRIN T. MISH: Yeah, absolutely. It was one of those deals where I knew that he didn’t owe and he knew he didn’t owe, quite frankly. He just didn’t know how to get the IRS to agree he didn’t owe.
KATRINA MADEWELL: You are listening to the IRS Solution Attorney show if you want to get Darrin his off-air number is 888-get-mish.
DARRIN T. MISH: 888-438-6474.
KATRINA MADEWELL: 888-get-mish for this week.
DARRIN T. MISH: We’re out.